What Return Should Investors Reasonably Expect?

this video is sponsored by noah an app i use to listen to articles from the world's leading financial publications the first 100 people to visit the link in the description below will get a week's free trial plus 50 off so you want to make it big with stock market investing that's cute well listen up bob you're gonna have to forget about those index funds and blue chip companies i mean come on single digit returns what is this the little leagues you should be aiming for one percent a day minimum no no no i know what you're thinking hasn't warren buffett the best investor in the world only made like 20 a year well you know what i tripled my total net worth of at least a few hundred dollars last month alone so really who are you gonna listen to old man value or this chad who's making a killing yellowing it what's that that how long have i been investing like six months why if you're new to investing the recent performance of a few key positions may have convinced you that investing is a easy source of riches not only are there stories of individuals making an absolute killing in the market with over 1 000 returns but some people like to suggest that high returns are easy from traders peddling the popular one percent a day target to random people who have only been investing for a short while highlighting that high returns are reasonable for the beginner but the truth is the return that most of us will likely experience throughout our entire investing journey is much lower than what others may claim to achieve on the one hand people often exaggerate their own experience and provide only short-term snippets of their results and on the other hand the past decade has been exceptionally kind to stocks and there are a few reasons the recent returns of the market may not repeat into the future as we'll discuss in the second half of this video so we shouldn't allow ourselves to become distracted by stories of people doubling or tripling their money in the past month after all it can be harmful for us to anticipate remarkable performance it often works against us and when things do fall short you're more motivated to change strategies or pursue higher risk things that will likely work against you so today we're going to go after a sobering journey towards a more reasonable target if you will it's not going to be fun but i think it's important and we'll start by addressing the more exuberant expectations i've seen online take the one percent a day for example something almost every training course seems to tout at one point or another at first glance it probably doesn't seem that unrealistic the markets do after all seem to rise and fall by roughly one percent a day so how hard can it really be to be on the right side of that movement over time but it doesn't take much to see why this is a very unlikely goal when you consider daily compounding or interest on top of interest a one percent daily return can turn a 100 investment into twelve hundred and forty dollars after one year over fifteen thousand dollars after two years and over 691 billion dollars in nine years time congratulations you've become the richest person in the world not bad for a 100 investment so clearly one percent a day isn't that reasonable but even an annual return in the high double digits isn't really that likely but richard that can't be true i just doubled my money this past month that's great truly but achieving a one-off spike in returns doesn't mean that you've found the key to the stock market what really matters here is consistency and very few people are able to achieve anything above 20 regularly over a 10 to 30 year period consider for example the medallion fund one of the best performing hedge funds in the world that's known for hiring mathematicians scientists and physicists to research stock opportunities this group has allegedly been able to earn more than 66 annually from 1988 to 2018 earning their investors 39 a year after fees now that's a remarkable return but if that's the unverified claim of one of the best hedge funds in the world chances are the rest of us are likely going to fall short so what can the average investor expect well again in any given year your return might be higher or lower than this amount but it's good to kind of gauge your expectation at the eight percent to 12 range as a general rule of thumb this range is grounded after all in the 90-year average return of the s p 500 which stands at 9.8 percent and while this is of course not a perfect measure given the makeup of the index and the fact that past returns don't guarantee future returns it's one of the best gauges we have now of course if you aren't 100 invested in stocks then your return will deviate further from this amount those with money in riskier assets like alternatives may see higher returns and those in safer assets like bonds will likely see lower returns but even with alternatives and other opportunities your long-term return is not likely to deviate meaningfully from this range but there are positions that have done better than that surely we can outperform the market if we invest in those right well yes there are certain positions that have seen higher returns than this over the long term and it's not impossible to beat the market in the same way some people do win the lottery some investors do make it big with certain bets and positions but again the idea is we're trying to set our gauge or our expectation of what returns we'll see we don't want to put that too high or else we'll likely be disappointed and fall victim to certain biases so we only care about the long-term consistent returns that investors are likely to achieve consider for example the mid-year 2020 us biba scorecard which showed that over a 15-year period 86.9 of large cap managers 81.4 percent of mid cap managers and 81.5 percent of small cap managers fail to outperform the s p 500 you see even though certain stocks and certain sectors outperform from time to time their returns don't often stay that way and it's been proven very difficult to time your investments to only take advantage of their upswing cycles so yes there are some that do achieve stronger results than the index but the point is we shouldn't go into it expecting that we'll outperform given how little data actually supports that notion now this isn't a question the merit of investors who have done well especially recently but oftentimes the people boasting about high returns tend to have short track records that are no longer than just a few years and it really doesn't make sense to treat such a short track record as being representative of our own long-term prospects most of us have yet to experience a multi-year decline so strategies that are higher risk and have done well this past decade for example trading call options and taking on leverage are unlikely to bode well should we encounter a longer downturn furthermore hindsight is 20 20 and we shouldn't cherry-pick the returns of a few individual positions or individuals to forecast our own future performance time and time again we've seen that high performing funds and managers of the industry eventually tend to fall short as time passes but richard this time is different let me stop you there i know more people than before seem to be excited about stocks these days especially with certain technological advances that have made trading easier for the average joe and hey the s p has earned a higher than average 15 annually over this past five years so some may come to think that returns are gaining speed and will accelerate into the future but the truth is the recent stock market performance has been driven by a few key factors three to be exact and these factors in all likelihood are not going to be sticking around forever firstly ever since the 2008 financial crisis the stock market has benefited from rock bottom interest rates as you know interest rates are the rate charged to anyone borrowing money and when rates are low companies are able to borrow money for well less money something that inherently makes them more profitable central banks around the world have been pushing down interest rates to support their economies something that has provided many companies access to financing to expand operations but eventually these rates should be increased as things improve that means higher expenses and lower access to capital for public companies things that could very well hurt their stocks performance and therefore impact our own portfolios secondly in addition to low interest rates we've seen unprecedented quantitative easing in the us i'll leave a link to another video of mine in the description below explaining how qe works but this is essentially another stock market stimulant the move increases money supply and tends to boost inflows into the stock market so if it is eventually reversed as and it should be in theory that will mean less money in the stock market and again an impact on returns finally while stocks have certainly been chugging along the past decade the underlying companies haven't actually been keeping up what i mean by that well since 2010 stock prices have been rising faster than the profits of the underlying firms meaning people have essentially been paying higher amounts or paying higher valuations for the same fundamental companies a simple measure of this is shiller's p e ratio a cyclically adjusted ratio of a company's stock price to their underlying profits stock price divided by earnings per share and over the last 10 years the measure has increased meaningfully from 23 times at the end of 2010 to 34.9 times at the end of 2020. to put that into perspective while the stock market has risen by roughly 200 percent over the past decade or 11.6 a year earnings have only increased just above 100 or 7.3 percent a year now that could be interpreted any number of ways investors may be expecting very high future profits and new technologies may have indeed gotten people excited about different areas of the markets but consider that in the height of the dot-com bubble the ratio maxed out at 44.2 times before crashing down and that was when people were excited about the internet possibly one of the biggest technological advances we've made as a species and something that most people believed would revolutionize everything we know it did of course but this didn't translate into profits for most underlying companies and well you know the rest so does that mean that stock returns are about to crash well no not necessarily it's impossible to predict whether markets will go from here i mean that when i say it but as mentioned these three factors have contributed meaningfully to recent growth in the market so what that means is it makes more sense for us to anchor our own expectations to the s p 500's long-term performance rather than what it's done more recently given these tailwinds after all while things like quantitative easing cryptocurrency and other trends may have led some to believe that things have shifted fundamentally for the everyday investor this time is different has come to be known as one of the most dangerous phrases in the world of investing we have and will continue to experience events that we've never encountered before and while that doesn't mean that we should be ignorant and certainly it's important to pay attention to these things the market has made it through periods of high inflation the great depression and booms on the opposite side of that it stands to reason that it will likely continue to chug along in the long term at some sort of rate we've seen in the past so if you've just started investing be disciplined look for opportunity but try to keep your head out of the clouds unless of course you're a child like me which case i'll see you on the moon as mentioned there's really no way to know where the markets will go in the short term but there's a lot of value in understanding how they got to where they are it can be a tough thing to keep track of all the moving parts that have contributed to our recent stock climb but if you want a good summary i recently listened to a great series titled can the stock market really go much higher on noah today's sponsor if you don't know noah is a news procurement app that professionally narrates and curates articles from publishers ranging on everything from finance and technology to sports and arts the series i mentioned for example dives deeper into the factors we highlighted in today's videos and why the markets may or may not be poised for future growth but these articles aren't just run-of-the-mill pieces you might find on facebook these are publications from highly regarded news sources like bloomberg the economist and the harvard business review and the series put together on the platform are curated by a team of human experts so rather than a loosely connected playlist you'll find that the series provides multiple insightful perspectives on the given topic it's an awesome service and if you want to try it out for yourself the first 100 people to visit the link in the description below or use coupon code bagel 50 we'll get one week of the premium tier service for free plus 50 off the annual subscription fee so if you've been wanting to listen to more expert pieces on finance and investing i highly recommend you check out noah [Music] you

Channel: The Plain Bagel

Views: 287,951

Keywords: The Plain Bagel, Investing

Id: F2hVSfn_llQ

Length: 13min 36sec (816 seconds)

Published: Fri Feb 26 2021